TOWARD A MORE COMPLETE MODEL OF OPTIMAL CAPITAL STRUCTURE

Most corporate finance practitioners understand the trade-off involved in making effective use of debt capacity while safeguarding the firm's ability to execute its business strategy without disruption. But quantifying that trade-off to arrive at an optimal level of debt can be a complicated and challenging task. This paper develops a simulation model of capital structure that starts by generating multiple estimates of market rates (LIBOR, currency rates) and corresponding company operating cash flows. To arrive at an optimal capital structure, the model then incorporates the shareholder value effects of alternative financing decisions by directly measuring the costs of financial distress, including the costs of missed investment opportunities and higher working capital requirements.
The model generates both a target credit rating and a lower fallback rating that permits a higher level of debt to maintain investments and dividends when operating cash flows are weak. As the model shows, companies with volatile cash flows and significant investment opportunities can add substantial shareholder value by establishing a fallback credit rating that is one or two notches below the target rating. The model also optimizes the mix of fixed versus floating debt, the maturity structure, and the currency composition. Another distinctive feature of the model is its ability to estimate the expected cost of alternative liability structures that can provide the liquidity insurance necessary to sustain the firm through periods of severe stress. This cost turns out to be quite small relative to the total market capitalization of the average firm.     

Motivations and Opportunity Recognition of Social Entrepreneurs

This study explores the motivations and opportunity recognition patterns of 30 Israeli social entrepreneurs (SEs) through life story analysis. The majority of participants were motivated by pull factors that included prosocial behaviors based on past or current life events. Others were motivated by push factors, including job dissatisfaction and a search for meaning. Based on grounded theory‐building and sensemaking perspectives, we develop a theoretical process model that links motivations, opportunity recognition, and prosocial activities of SEs. Their experiences created an awareness of unmet societal needs, which led to opportunity recognition and formation of social ventures to help fill the gaps.